USDA loans for rural homes. This is what the USDA is known for aside from its farm financing programs for a diverse range of farmers. And under its single-family housing program, there are two types of USDA loans, direct loans and guaranteed loans.
While borne out of the same purpose, it’s important to distinguish the two USDA loan types because each has its own set of qualifying guidelines that may or may not work for you given your current circumstances.
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USDA’s Single-Family Rural Housing Loans
Pursuant to the Department of Agriculture Reorganization Act of 1994, the USDA created Rural Development as its arm in improving the economy and qualify of life in rural America via rural housing and community development activities.
The USDA Rural Development currently has $216 billion loan portfolio and plans to use $38 billion toward direct loans, guaranteed loans, and grants.
This leads us to the much-awaited comparison of USDA’s Section 502 direct and guaranteed loans.
USDA Loans: Direct vs Guaranteed
This summarizes the differences and similarities of the two rural housing loans.
Primary Difference: The USDA is the lender of direct loans. This makes the loans subsidized, unlike guaranteed loans where the USDA backs a portion of each loan and have an approved lender make the loan.
Credit: Lenders will have varying credit score requirements when making guaranteed loans. The USDA as lender of direct loans also requires a good credit history. Nevertheless, both loan programs require the borrower to demonstrate an ability to repay his/her debt obligations in a timely manner.USDA-approved lenders are accessible here.
Income: Individuals applying for direct loans must have low to very low income that makes it difficult for them to quality for a conventional mortgage financing. Guaranteed loans target borrowers with low and moderate income as per their guaranteed housing program income limits.
Interest rate: On direct loans, the interest rate is fixed at 3.25%, effective October 1, 2017. Expect rates on guaranteed loans to vary as lenders will make these loans.
Purpose: Both USDA loans enable borrowers to buy decent, sanitary and safe homes in eligible rural areas. Guaranteed loans take that further by allowing eligible homebuyers to rehabilitate or relocate their homes.
Property: USDA loans are used for the purchase of modest homes in rural areas. By modest, the home must (i) meet the USDA standard square footage of 2,000 square feet or less; (ii) not have in-ground swimming pools, income-producing structures, and other features prohibited by the US; and (iii) not have a market value that exceeds its applicable county loan limit.
Occupancy: The borrower must occupy the home as his/her primary residence as required by both loan programs.
Loan limit: How much an applicant can borrow for a direct loan would depend on his/her income, assets, debts, payment assistance grants, and the area loan limit.
Loan term: Borrowers with direct loans will repay them within 33 years or 38 years for very-low income borrowers who can’t afford a 33-year loan. Guaranteed loans must have a loan term of 30 years.
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